Permissible Preferred Lender Lists

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The U.S. Education Department has been quietly proceeding with its examinations of colleges where all or most of the federal loan volume flows to one lender, giving a clean bill of health to at least two institutions so far. Administrators at Middlebury College and Lawrence Technological University said that department officials had visited their campuses in recent weeks and departed having concluded that the fact that so many of their borrowers used one lender did not signify a problem.

Middlebury and Lawrence Tech had been among the 921 institutions to which the department sent letters in June expressing concern that at least 80 percent of their federal student loan volume was held by one lender. Department officials have characterized a single lender’s domination of a college’s loan volume as a red flag, providing evidence that the institution is directing prospective borrowers to that lender (which usually appears on its list of "preferred lenders") and raising questions about why.

Many of the institutions that had been found in this year's student loan investigation to have revenue sharing agreements with lenders, for instance, had directed much of their loan volume to those lenders, with the implication that they were doing so to increase their cut of the loan funds. But many college officials have countered that there are perfectly good reasons why many or most students at an institution would choose a particular lender, and that as long as the college allows students to use any lender they wish, as federal law requires, there is nothing nefarious about one lender's domination of loan volume.

Education Department officials confirmed last month that they were following up the broad-based letter writing campaign with on-campus reviews of an undisclosed number of colleges. Department officials have declined to share the list of colleges that are undergoing such reviews, although Middlebury had acknowledged that it would get that treatment.

Last week, the department, in response to a Freedom of Information Act request filed by the newsletter publisher Higher Education Washington Inc., released a list of the 921 colleges that received the initial letters. (A list of the 291 institutions that directed 100 percent of their loan volume to one lender appears below, and an Excel spreadsheet of the entire list of 921 colleges can be found here.)

Calls to some of those colleges turned up at least one other institution that had received an in-person visit from the Education Department. Federal officials must have been drawn to Lawrence Tech, in Michigan, by the fact that all but 13 of the 2,636 federal loans taken out by borrowers at the university last year went through Bank One.

But Bruce J. Annett Jr., executive director of marketing and public affairs at Lawrence Tech, said in an e-mail message that the "focused program review" that department officials did of its loan procedures and practices last month had concluded with a finding that "Lawrence Tech is in full compliance with federal standards and guidelines." Annett added: "We are allowed to have a preferred lender so long as our students are aware that they have choices. They are and do."

Patrick Norton, associate vice president for finance and controller at Middlebury, said that during its visit from the department -- which U.S. officials had downgraded from an "investigation" to a "review" to "information gathering" -- college leaders explained that Middlebury had conducted a competitive bidding process for a single "suggested" lender when the college began its transition out of the federal direct student loan program last year. Middlebury based its competition on which lenders offered the best benefits for students, notably by not charging borrowers any fee to originate a loan.

Middlebury chose the National Education Loan Network as its sole suggested provider last year, though it permitted borrowers to use other lenders, too, as federal law requires (1,372 of its 1,403 borrowers went with Nelnet). The college itself received no payments or other benefits from Nelnet in exchange, Norton said. "We tried to put blinders on when it comes to [factoring in] anything other than borrower benefits," Norton said.

This year, Middlebury is adding three more lenders to the list it suggests to students, a list that Norton said Middlebury continues to believe serves an important purpose. "We feel not to list suggested lenders is going to put students and parents at a disadvantage," he said. "It's important for us to do our review of the lenders out there, and come out with the best suggestions we can for our students."

The time Education Department officials spent on the Middlebury campus appeared to persuade them, Norton said. "They left saying there are no findings and that's that -- which is what we thought all along."

Department officials could not be reached over the weekend to confirm the outcome of the reviews at Middlebury and Lawrence Tech.

The Education Department's oversight, together with pending federal legislation, appears to be prompting some changes in colleges' behavior, however. Several other recipients of the June letters encouraging colleges to review their practices said that they were altering their policies.

Harry Wilkins, chief financial officer of American Public University System, where all 763 student loan borrowers had loans from Sallie Mae last year, said that even though the university's preferred lender list contains four lenders, officials suspected borrowers were drawn to Sallie Mae because it appeared first on the university's list. Officials at the university system, which owns American Military University and American Public University, plan to begin rotating the four lenders this year, Wilkins said, to try to ensure that none of the university's suggested lenders gets inappropriately preferred status.